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An Analysis of the Economic Situation in the First Half of 2003 and an Outlook for the Whole Year
2003-09-01
Lu Zhongyuan, Zhang Liqun & Li Jianwei
Under the correct leadership of the Party Central Committee and the State Council, and with concerted efforts of the whole nation, the SARS epidemic has been brought under an effective control. The economic trend for the second half of this year has become increasingly clear. But the follow-up impact of the epidemic still cannot be neglected. A comprehensive analysis of the short, medium and long-term factors that have an impact on economic growth indicates that the Chinese economy has entered a new round of rapid growth, that this round of growth can last for a considerably long time, that the Chinese economy clearly has a greater capacity to resist external shocks, and that the epidemic is unlikely to change the robust inherent growth trend of the economy. Our quantitative analysis and model-based forecast indicate that the growth of the gross domestic product for the whole year is estimated to reach about 8 percent after the follow-up impacts of the SARS epidemic are taken into account.
I. The Basic Judgment of the Current Economic Situation
1. The impacts of the SARS epidemic are being gradually released but they are unlikely to reverse the economic growth for the whole year
In the first five months, the national economy had maintained an excellent development performance. The growth rates of investment and export further rose, the fiscal revenue increased faster, the financial situation was stable and the economy continued to rebound steadily. The impact of the oil price hikes on the international market caused by the Iraq war on China’s foreign economic and trade activities was not so severe. However, the SARS epidemic produced a disturbing effect on the economy in April and May. The rate of industrial growth dropped from 17.2 percent in the first quarter to 13.7 percent in May. The rate of consumption growth also fell from 9.2 percent to 4.3 percent during the same period. Social services suffered a serious blow. The sample survey of the 11 service sectors in 20 provinces, autonomous regions and municipalities show that the average revenue of all these sectors in May declined 37.4 percent compared to the same period of last year. The volume of transport dropped sharply, with the passenger and cargo transport volumes in the first five months respectively falling 6.6 percent and 0.1 percent compared to the same period of last year. In addition to these tangible effects, the SARS epidemic still has some delayed impacts, which are yet to be assessed. But overall, the epidemic’s impact on the Chinese economy is of a short-term and limited nature. Even if its negative impact on the economy will continue to release in the third quarter, the trend of a steady economic rebound is unlikely to change in the second half of the year or even for the whole year.
2. The Chinese economy has entered a new round of fast growth and its inherent capacity to resist shocks is visibly stronger
The Chinese economy began a new round of fast growth last year. An analysis of the internal factors that have a cyclical impact on economic growth shows that this cycle of growth will last for a considerable period of time. The following are the main manifestations:
(1) Inventory investment picked up again. The timely inventory adjustments done by enterprises in line with the changes in market supply and demand have an important impact on the short-term fluctuation of the economy. When the inventory level is relatively low and market demand picks up, enterprises improve their forecast for market prospect. To ensure supply, they will increase inventory. Therefore, a rise in inventory investment is an important indicator that the short-term economic growth has entered a period of expansion. China’s growth rate of fund occupation by finished industrial products began to rise, on a monthly basis in July 2002, and reached 9.9 percent in April this year. This was the highest level since August 1998. The pattern of the changes in China’s inventory investment shows that the rising period lasts for about two years. If there were no unexpected shocks, the acceleration of the short-term economic growth driven by rising inventory investment is likely to continue till the first half of next year.
(2) The growth of investment in fixed assets quickened up. Investment in fixed assets is both a reflection of the current demand as well as a decisive factor of future production capacities. Our study shows that the rapid economic growth pushed by faster investment growth can last for about four years. The growth of China’s investment in fixed assets began picking up in 2000 and has since become increasingly higher. The average growth rate in the first five months of this year was more than 30 percent. In the meantime, the growth of the gross domestic product also gained momentum. This shows that the Chinese economy has entered a fast growth period driven by investment increase. This fast growth is estimated to continue till 2005.
(3) The upgrading of the economic structure intensified. China is in the middle period of industrialization, and the structural upgrading that is closely related to final demand is a medium and long-term driving force for economic growth. The 1998-2002 period was the time noted for the fastest upgrading of the residents’ consumption structure since the beginning of the reform and opening up (one manifestation is the decline in the Engel coefficient). Driven by technological advance, consumption upgrading and the related fast-growing industries, China’s ongoing upgrading of industrial structure has become more forceful again. According to our study, the push to economic growth by the faster upgrading of industrial structure can last for about eight years, namely from 2003 to 2011. During this period, the Chinese economy will maintain a rising trend (short-term fluctuations cannot be ruled out).
On the basis of structural upgrading, system innovation and further opening up, the inherent growth momentum of the Chinese economy has become more sustainable and its capacity of resisting negative impacts has become visibly stronger. This is different from the situation when the Chinese economy had to face the impact of the 1997 Asian financial crisis. At that time, the Chinese economy was entering a period of contraction, and the economic growth itself had a trend of slowdown and its inherent capacity to resist shocks was relatively weak. This year, although the epidemic will contain the economic growth rate to a certain degree, it will not have a substantive damage to the basic pattern of a sustained and rapid economic growth and will not shake the internal trend of an economic expansion. In view of the above analysis and the forecast of macroeconomic measuring models, the economic growth rate for this year is estimated to reach about 8 percent even if the follow-up impacts of the SARS epidemic are taken into account.
II. The Contradictions and Problems That Deserve Close Attention
1. The SARS epidemic has increased employment pressure and has a relatively serious impact on the income of the low-income groups
China’s labor supply is in the peak time in recent years. In 2003 alone, the newly added labor is 2 million people more than that of the previous year. The tertiary industry has offered 70 percent of employment to newly added labor in the past five years, and has become the main channel for employment expansion. The SARS epidemic has produced the most serious impact on the catering industry, commerce, social services and small and medium-sized enterprises, all of which offer large amounts of jobs. Many small and medium-sized enterprises suspended their operations or simply closed down, which has caused employment demand drastically falling and aggravated the already acute employment contradiction. The impact on employment directly led to a slowdown in the pace of income growth of the urban and rural low-income groups and even to an absolute reduction in their incomes. According to a survey by the National Bureau of Statistics, the epidemic had forced about 7-8 million migrant workers to return to their native rural areas. It is estimated that the average per capita net income of the farmers will drop by 35 yuan and the growth rate of their cash income in the first half of this year would fall 3 percentage points compared to the same period of last year. In the urban areas, the suspension or closedown of the small and medium-sized enterprises in the tertiary industry has markedly increased the difficulty for the unemployed and laid-off people to find jobs again and accordingly has a negative impact on their incomes. In a considerable time to come, the unemployment pressure and the difficulties facing the urban and rural low-income groups will be prominent problems for economic and social development. The economic warm up can hardly ease the contradiction in these areas in a short time and in a visible manner.
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